Should You Take a 7-Year Car Loan?

By AnnaMaria Andriotis

The average duration of a new car loan rose slightly to 64 months in the second quarter of 2012, according to data released Tuesday by Experian. That’s up slightly from a year ago and the highest since 2008. But in many cases, borrowers are signing up for even longer loans.

The biggest area of growth in auto loans is among those with repayment periods of 73 to 84 months, which accounted for nearly 16% of all new car financing in the second quarter. At seven years, these loans last nearly as long as the typical marriage ending in divorce, according to the U.S. Census.

But is signing up for these extended repayment periods worth it for borrowers? That depends, experts say.Traditionally, such long-term loans have cost one to two percentage points more than the shorter-term options. However, a growing number of car manufacturers have recently started offering lower rates, says Alec Gutierrez, senior market analyst of automotive insights at Kelley Blue Book. In some cases, rates of 0% to 2% are available on loans of up to six years, he says. Prior to the recession, it was rare to find six-year car loans with rates under 5%, he says.

These loans are also now easier to come by, says Keith Leggett, a vice president and senior economist at the American Bankers Association. During the credit crunch, many lenders pulled back on offering loans that ran longer than five years, but as restrictions eased in this sector, the extended repayment has been brought back, says Melinda Zabritski, director of automotive credit at Experian.

But just because seven-year car loans are available doesn’t mean borrowers should be signing up for them, experts say. For borrowers, the main appeal of longer repayment periods is that they offer lower monthly payments. But these loans also come with risks, including thousands more in interest over the life of the loan – even at low interest rates. For instance, a borrower who signs up for a car loan of $25,714 at 4.63% (the average rate and amount financed on new cars) would pay about $2,500 in interest over the life of a four-year loan. But a borrower who finances this amount at the same rate over a seven-year period would pay about $4,440 in interest.

In addition, borrowers should consider how long they’ll keep the car. Those who plan to sell in three or four years but sign up for a loan that runs a longer period could end up owing more on the car than it’s worth when they try to unload it.

Comments (0)

About Real-Time Advice

How breaking news — in the markets, Washington, and around the world — affects you and your money. Have a question about how current events may change your financial future? Email us at ask@smartmoney.com.